Perlus Investment Management LLP

Perlus Investment Management LLP

July 10, 2013 16:57 ET

Letter from Dissident Shareholders of Wenzel Downhole Tools Ltd.

CALGARY, ALBERTA--(Marketwired - July 8, 2013) -

July 8, 2013


Wenzel Downhole Tools Ltd.
#1000 Elveden House, 717-7th Avenue SW
Calgary, AB T2P 0Z3

Attention: Charles Laurey, Chairman

Dear Sirs/Mesdames:

We represent a group of shareholders (the "Dissident Shareholders") of Wenzel Downhole Tools Ltd. (the "Company") representing a significant percentage of the Company's outstanding share capital. We are writing to you in connection with the information circular (the "Circular") of the Company dated June 17, 2013 which was circulated to shareholders with relation to a special meeting to be held to approve a Plan of Arrangement (the "Arrangement") with a subsidiary of Basin Tools, L.P. We are concerned that the price of $2.25 per share of the Company (the "Consideration") does not reflect a fair value for the Company. Our primary concerns are threefold. The first is with the multiple which was used in the Precedent Transaction Approach in the Valuation and Fairness Opinion Report of Raymond James Ltd. dated June 17, 2013 attached as Appendix E to the Circular (the "Report"). The second is with the calculation of working capital in the Report and the third is with the fact that the Company agreed to a non-solicitation clause.

Multiple Analysis

The Report uses a multiple of 5.02x in its base case analysis in the Precedent Transaction Approach which results in an implied value per share of $2.21. A twelve month trailing EBITDA figure of $18.72 million for the period ended March 31, 2013 is used. A more appropriate multiple, based on more current transactions carried out in the oilfield services sector, would be 5.9x. A 5.9x multiple would result in an implied value per share of $2.66 while still using the balance of assumptions utilized in the Report. This, in and of itself, is an 18% improvement over the Consideration. We believe that the actual implied value per share should be higher still as we believe that the assumptions used in the Report are flawed. The Total Debt figure of $16,270,000 utilized in the Report in calculating the Precedent Transaction Multiple Based Equity Value per Common Share in Table 14 of the Report would appear to double count short term debt of $2,369,136 as short term debt would typically be deducted in calculating net working capital but such amount is then added again to the long term debt of $13,900,578 to arrive at a Total Debt figure. As mentioned above, we also believe that the working capital calculation is flawed. If the implied value per share is recalculated using the proper multiple, a proper long term debt figure and adding back a total working capital surplus adjustment of $32,756,731, the result is an implied value per share of $3.58, a 59% improvement over the Consideration.

Working Capital Analysis

The Report attributes no value to the working capital position of the Company. The Company historically has had a large working capital surplus so the methodology utilized in the Report is not consistent with that reality. Working capital is traditionally defined as current assets less current liabilities. For March 31, 2013 this figure is $32,756,731. In the Report it is assumed that the Company will require approximately 134 days of revenue to sustain operations through an entire sales cycle based upon the average annual historical requirements of the Company. Unfortunately these calculations are based on a time when the Company was experiencing 40% plus sales growth two years in a row and therefore the working capital requirements of the Company, specific to inventory build would be far higher than when forecasting sales growth of 4% or less. The inventory requirements for a rapidly growing company are just not the same as for a company that is in the throes of a moderate, normalized growth cycle. Roughly 90% of Wenzel's Total Inventory consists of its rental fleet, which is currently not running at full utilization and generates quarterly cash flow. There is little to no obsolescence risk associated with this fleet which constantly undergoes maintenance. The complete abandonment and neglect of monetary value associated with both receivables and inventory is unfair at best. Assigning adequate value to the working capital of the Company is essential. The components of working capital, in the case of the Company, are primarily trade receivables and inventory with another $5M in income tax recoverable, most likely having already been collected in the second quarter to pay down debt. These components have significant value and should not be completely discounted as they are in the Report.

Non-Solicitation Clause Analysis

The Company has agreed not to solicit, assist, facilitate, encourage or initiate any inquiries, requests or proposals or offers from any other party. This restriction has the effect of preventing the Company from seeking alternative proposals which could result in the Company receiving a superior proposal. This, combined with a break fee that must be paid in the event that the Arrangement with Basin does not proceed, has a chilling effect on any potential bidding process and puts into question the motives and independence of the board in agreeing to such a provision.


It is our view that the Consideration seriously undervalues the Company and that the Report provides a misleading perception that the Consideration is fair. We hope that the board of directors will reconsider the fairness of the Consideration and reassess it in light of the foregoing factors. We would be happy to discuss the foregoing in greater detail with you, explaining our view the Company is being sold for a fraction of its true value. If we are unable to come to a mutually agreeable resolution to the foregoing by July 11, 2013, we will be forced to seek whatever alternative remedies which may be available to us. We are keenly aware the vote is to take place in 9 working days from now, and thus look forward to hearing from you at your earliest opportunity.

Yours truly,


Contact Information

  • Perlus Investment Management LLP